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In Islam, it is a common ruling that the product that a person buys should exist physically (i.e. you are not allowed to sell something that does not exist), which brings up a very real concern when dealing with online trading (where I'm not directly involved with, and am unable to actually see, the transaction taking place).

I need to know, when I buy currency online using some online forex trading platform, am I really buying that currency? Or is the situation more like playing with the live rates, where the exchange is just recorded but there's no actual physical currency involved?

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    Nobody moves physical currency nowadays, unless it involves ill gotten gains(mostly). It is a waste of resources to move tonnes of currency from London to NewYork to settle a $100 million trade, which often happens on a daily basis. – DumbCoder Jan 2 '14 at 16:36
  • Maybe I haven't clearly stated what I wanted to ask. Basically my question is, does that money exist? I know paper money is not involved these days, even when I pay for my lunch at the cafeteria. But the money exists(I loaded it into my cafe card). Anything I buy from my card is being bought with real money that exists. But if I use the same card to buy 500 USD$(with my euros) from an online broker, then sell them at a profit and earn $30 profit, then do the $30 or the $500 that i bought really exist? Or was that money created out of thin air? – detraveller Jan 2 '14 at 21:20
  • Tough question. The answer is that the money does actually exist, and when you exchange the currencies you can ask for them to be paid out to you in bills if you choose. It's much like buying a nonperishable commodity, like gold; you can buy some, sit on it for a while, and when its value goes up you can resell it. Whether this is "speculation" (gambling) or a value-added service is a matter of perspective; it could be argued that you are acting as a miniature bank, holding a store of U.S. dollars available to a buyer who needs them for the right price in Euros. – KeithS Jan 3 '14 at 18:18
  • Are you paying interest on the leverage amount of the currency trade? – Michael May 6 '15 at 18:59
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With Forex trading - physical currency is not involved. You're playing with the live exchange rates, and it is not designed for purchasing/selling physical currency. Most Forex trading is based on leveraging, thus you're not only buying money that you're not going to physically receive - you're also paying with money that you do not physically have.

The "investment" is in fact a speculation, and is akin to gambling, which, if I remember correctly, is strictly forbidden under the Islam rules.

That said, the positions you have - are yours, and technically you can demand the physical currency to be delivered to you. No broker will allow online trading on these conditions, though, similarly to the stocks - almost no broker allows using physical certificates for stocks trading anymore.

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I asked a followup question on the Islam site. The issue with Islam seems to be that exchanging money for other money is 'riba' (roughly speaking usury). There are different opinions, but it seems that in general exchanging money for 'something else' is fine, but exchanging money for other money is forbidden. The physicality of either the things or the money is not relevant (though again, opinions may differ). It's allowed to buy a piece of software for download, even though nothing physical is ever bought.

Speculating on currency is therefore forbidden, and that's true whether or not a pile of banknotes gets moved around at any point. But that's my interpretation of what was said on the Islam site. I'm sure they would answer more detailed questions.

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This is somewhat of a non-answer but I'm not sure you'll ever find a satisfying answer to this question, because the premises on which the question is based on are flawed.

Money itself does not "exist physically," at least not in the same sense that a product you buy does. It simply does not make sense to say that you "physically own money." You can build a product out of atoms, but you cannot build a money out of atoms. If you could, then you could print your own money. Actually, you can try to print your own money, but nobody would knowingly accept it and thus is it functionally nonequivalent to real money.

The paper has no intrinsic value. Its value is derived from the fact that other people perceive it as valuable and nowhere else. Ergo paper money is no different than electronic money. It is for this reason that, if I were you, I would be okay with online Forex trading.

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I think you need to define what you mean by "buy currency online using some online forex trading platform" ...

In large Fx trades, real money [you mean actual electronic money, as there is not paper that travels these days]...

The Fx market is quite wide with all kinds of trades. There are quite a few Fx transactions that are meant for delivery. You have to pay in the currency for full amount and you get the funds electronicall credited to you in other currency [ofcouse you have an account in the other currency or you have an obligation to pay]. This type of transaction is valid in Ismalic Banking.

The practise of derivaties based on this or forward contracts on this is not allowed.

  • I was talking about platforms like eToro(Online Forex trading). And what I meant by 'buy currency online' was a transaction, for example, buying a lot of EUR/USD. Could you kindly elaborate on the third sentence of the third paragraph(You have to pa...)? – detraveller Jan 2 '14 at 21:13
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When you buy a currency via FX market, really you are just exchanging one country's currency for another. So if it is permitted to hold one currency electronically, surely it must be permitted to hold a different country's currency electronically.

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Good answer BLaZuRE, except the supply of money is not static, it is being created and destroyed by banks constantly (see: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf?la=en&hash=9A8788FD44A62D8BB927123544205CE476E01654). So if a currency trader is using a line of credit from a bank when they leverage a trade, none of the currency they're trading existed before the bank created it for them.

  • Welcome to PF&M. Additions to other answers are best done as comments on or edits to those answers. Bear it in mind for when you have enough reputation for those actions. – Rupert Morrish May 12 '18 at 21:43
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This is my two cents (pun intended). It was too long for a comment, so I tried to make it more of an answer. I am no expert with investments or Islam:

Anything on a server exists 'physically'. It exists on a hard drive, tape drive, and/or a combination thereof. It is stored as data, which on a hard drive are small particles that are electrically charged, where each bit is represented by that electric charge. That data exists physically. It also depends on your definition of physically. This data is stored on a hard drive, which I deem physical, though is transferred via electric pulses often via fiber cable. Don't fall for marketing words like cloud. Data must be stored somewhere, and is often redundant and backed up.

To me, money is just paper with an amount attached to it. It tells me nothing about its value in a market. A $1 bill was worth a lot more 3 decades ago (you could buy more goods because it had a higher value) than it is today. Money is simply an indication of the value of a good you traded at the time you traded. At a simplistic level, you could accomplish the same thing with a friend, saying "If you buy lunch today, I'll buy lunch next time". There was no exchange in money between me and you, but there was an exchange in the value of the lunch, if that makes sense. The same thing could have been accomplished by me and you exchanging half the lunch costs in physical money (or credit/debit card or check).

Any type of investment can be considered gambling. Though you do get some sort of proof that the investment exists somewhere Investments may go up or down in value at any given time. Perhaps with enough research you can make educated investments, but that just makes it a smaller gamble. Nothing is guaranteed. Currency investment is akin to stock market investment, in that it may go up or down in value, in comparison to other currencies; though it doesn't make you an owner of the money's issuer, generally, it's similar. I find if you keep all your money in U.S. dollars without considering other nations, that's a sort of ignorant way of gambling, you're betting your money will lose value less slowly than if you had it elsewhere or in multiple places.

Back on track to your question:

[A]m I really buying that currency? You are trading a currency. You are giving one currency and exchanging it for another. I guess you could consider that buying, since you can consider trading currency for a piece of software as buying something.

Or is the situation more like playing with the live rates? It depends on your perception of playing with the live rates. Investments to me are long-term commitments with reputable research attached to it that I intend to keep, through highs and lows, unless something triggers me to change my investment elsewhere. If by playing you mean risk, as described above, you will have a level of risk. If by playing you mean not taking it seriously, then do thorough research before investing and don't be trading every few seconds for minor returns, trying to make major returns out of minor returns (my opinion), or doing anything based on a whim.

Was that money created out of thin air? I suggest you do more research before starting to trade currency into how markets and trading works. Simplistically, think of a market as a closed system with other markets, such as UK market, French market, etc. Each can interact with each other. The U.S. [or any market] has a set number of dollars in the pool. $100 for example's sake. Each $1 has a certain value associated with it. If for some reason, the country decides to create more paper that is green, says $1, and stamps presidents on them (money), and adds 15 $1 to the pool (making it $115), each one of these dollars' value goes down. This can also happen with goods. This, along with the trading of goods between markets, peoples' attachment of value to goods of the market, and peoples' perception of the market, is what fluctates currency trading, in simple terms. So essentially, no, money is not made out of thin air. Money is a medium for value though values are always changing and money is a static amount. You are attempting to trade values and own the medium that has the most value, if that makes sense. Values of goods are constantly changing.

This is a learning process for me as well so I hope this helps answers your questions you seem to have. As stated above, I'm no expert; I'm actually quite new to this, so I probably missed a few things here and there.

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